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Monday, May 23, 2016

Interest Rate Cycles: An Introduction

Monetary policy has increasingly become the focus of economists and investors. This report describes the factors driving interest rates across the economic cycle. Written by an experienced fixed income analyst, it explains in straightforward terms the theory that lies behind central bank thinking. Although monetary theory appears complex and highly mathematical, the text explains how decisions still end up being based upon qualitative views about the state of the economy.

The text makes heavy use of charts of historical data to illustrate economic concepts and modern monetary history. The report is informal, but contains references and suggestions for further reading.

This report is available in eBook format, and the paperback has been published on June 7; it will appear at online booksellers over the coming days (links will be added below). The text is around 27,000 words, and is richly illustrated. (Paperback edition is 102 pages, excluding front matter.)

Paperback Edition

Please note that the paperback is non-returnable, except in the case of manufacturing defects.

Availability:

Direct from CreateSpace (the on-demand printer). There is a 20% discount (I have not tested this code, please make sure the billing is correct if you use it!) if you use the code S6AKAJNZ (I have not yet set the expiry date of the code).

It should start to appear at other online booksellers within a few days (weeks?) of June 7th.

Many book stores will be able to order the book as a special order; the book will show up in catalogues by mid-July at the latest. You will either need to order it based on my name and book title, or the ISBN.

Ebook Available At Online Retailers

The book is available in the Kindle Format at Amazon. The control to the left allows for direct purchase at Amazon.com.

Description

The following description is from the introductory section to the report. Online retailers have longer previews available.

This report offers an informal introduction to modern central bank watching, explaining why interest rates are raised and lowered across the business cycle. The objective is to illustrate the logic behind central bank decisions, without plunging into the mathematical complexity of modern monetary economic theory. Whenever possible, concepts are illustrated with charts of economic and financial time series.

Although the author is a follower of post-Keynesian economics, this text focuses on “mainstream” economic theory (sometimes called neoclassical economic theory). The explanation for this is that the central bankers who set the policy rate are followers of mainstream theory, and so we need to understand that theory if we wish to understand their decisions.

Therefore, if we want to understand why policy rates are administered the way that they are, we need to understand mainstream logic. One could imagine an alternative theory how interest rates ought to be set, but until central bankers adopt that theory, it tells us little about real world interest rate determination.

The underlying theme of the analysis is somewhat pessimistic. Mainstream macroeconomic theory is highly mathematical, and seems to offer a precise understanding of the business cycle. Unfortunately, at the core of the theory there are a number of variables that are not directly measured, and the current values of those variables are uncertain. It is easy to explain historical events, since estimates of those variables can be pinned down. However, the clarity of explanations for historical developments is in sharp contrast to the quality of model-based forecasts. The usefulness of the mainstream analytical framework is that it provides a way of thinking about the business cycle, at the cost of fundamental uncertainty around the values of key variables.

About The Report

(The following was taken from Section 1.3.)

This report is informal, and the use of equations was largely avoided (only a few elementary expressions appear). Whenever possible, ideas are illustrated using charts of economic data. (Since eBooks have poor support of page numbers, some charts are repeated between different sections, as it is otherwise awkward to refer back to them. Furthermore, endnotes are also avoided because of their awkward handling in eBooks.) The References section gives the bibliographic details (and hyperlinks) for materials that are cited. The objective of this report is to give a high-level overview of the subject, and not to act as a textbook.

The text is aimed at readers who are comfortable reading financial news articles, and who wish to understand interest rate markets. Whenever possible, technical terms are defined, although it is assumed that the reader is familiar with basic concepts, such as the business cycle. However, these definitions are kept brief in order to avoid distracting more advanced readers.

2 comments:

You write that although you're a follower of post-Keynesian economics, the report will focus on how central bankers take decisions based on their understanding of mainstream economics. That's crucially important and absolutely necessary.

However, do you know of anything similar with respect to post-Keynesian thought on interest rates, and anything that compares and contrasts with the mainstream view, without having to dish out for a huge tome like Lavoie's? It'd be useful to read your new eBook alongside something similar on the post-Keynesian view. As you'll appreciate, although anything worth understanding is worth taking the time for, I don't have the time to read and figure out hundreds of pages of academic economics.

As superb as your previous eBook was, it briefly touched on this. Perhaps that will be the subject of your next eBook: a post-Keynesian theory of interest rates?

From a broad post-Keynesian perspective, there are two areas of disagreement with regards to interest rates.

One is the possibility that interest rates do not have the effect assumed by the mainstream. There is disagreement within PK economics; one view (by Warren Mosler, amongst others) is that interest rates have the opposite effect than is assumed by the mainstream. (Other PK'ers have views that are more neutral.) Although an interesting area of debate (shows up in the mainstream as the "neo-Ricardian" view), it really makes easy explanations of what is going on difficult. ("They raised the interest rate in XXXX. This caused the economy to slow down, or speed up, depending upon who you believe...") This is why I noted the debate within the report, but I did not pursue it.

The second area is in how the business cycle operates, which I do touch upon in a couple of sections in the report.

Since the policy rate is being set by mainstream economists, if we want to understand why rates go up and down, we need to understand the mainstream view. (There may or may not be arguments about how bond yields relate to the policy rate, but the PK view is not that different from the mainstream.)

I will eventually do eReports explicitly on PK economics; I need to decide what is the best topic to pick up. I want to keep future reports shorter, but with more details, so it will only be on a narrower topic. There's a few possibilities: functional finance, an MMT primer, PK analysis of inflation. I would like to do an intro to SFC models, but that will require an ability to format equations, which is difficult for ebooks. (I can typeset equations in LaTex, but it could only be sold as a paperback, or via Kindle.)

I was planning on my next report being on money; it was going to be a shorter "greatest hits" report (articles taken directly from this site, with light editing).

Note: Posts may be moderated, and there may be a considerable delay before they appear.

Although I welcome people who disagree with me, please be civil.

Please note that my spam comment filter appears to dislike long "anonymous" posts. I get no warning about this, and only go through my "spambox" infrequently. The best bet it to keep comments short, and if you think the spam filter struck, let me know with a short comment.

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See my "Disclaimer" page for my privacy policy as well as advertising affiliate information. Please note that I use Google Analytics, which tracks user data; you will need to look at their documentation to see what they do about privacy. This website also incorporates links that are part of the Amazon affiliate program (which includes the images of book covers); you will need to consult their websites to see what tracking information they use. This blog contains general discussions of economic and financial market trends for a general audience. These are not investment recommendations tailored to the particular needs of an investor. The author may discuss strategies which are wildly inappropriate for retail investors. Any mention of corporate securities are for illustrative purposes only; the author does not make recommendations to buy or sell such securities (and frankly, has no expertise to do so). No warranties are made with regards to the correctness of data or analysis, and some data may be under copyright protection of the original data provider. Past performance is not a predicton of future performance (which should make some bond bulls fairly nervous).